Use “Wraparound Mortgages” to Improve Cash Flow by 50%
Two important strategies for real estate investors to improve cash flow are Long Term Lease To Own and Real Estate Contract. Real Estate Contract is a form of owner financing and can be structured even the Seller/Owner has an existing loan.
Wraparound mortgage also known as an all inclusive trust deed (AITD), commonly called a “wrap”. In a wrap-around mortgage transaction, the seller accepts a promissory note (or a contract for deed or land contract) from the buyer for the total amount of the purchase price less any down payment paid by the buyer. The new purchaser then makes monthly mortgage payments to the holder of the note, typically the seller, who in turn is responsible for making payments to the primary mortgage(s) on the property.
Usually this is a short term note with a 3-5 year balloon payment due. The promise behind this type of transaction is to allow the buyer time to obtain standard mortgage financing. Once the buyer is able to refinance the property all existing mortgages are paid in full.
One of the benefits, in addition to faster sale, quicker close, is that the seller often charges a higher interest rate than their existing mortgage to the buyers. This additional interest is called a spread and is interest income for the note holder. The interest income can usually range from 20% to 40% more than rental income. It greatly improves your bottom line compares to simply renting the property to a renter. Your cash flow can easily improve by more than 50% because the buyer typically will also pay for your property tax and insurance premium.
A due-on-sale clause requires that the entire mortgage balance is due if the home is sold. If mortgage payments are paid timely, lenders are not known to enforce this clause regularly, but buyers and sellers contemplating this type of transaction must be aware of all the risks.
The best ways to alleviate such risk is to require the use of Escrow Company that collects payments from the buyer and disburse payments to the seller’s loan lender before any remaining balance been forwarded to the seller. This makes sure the first loan is paid on-time. It’s also very important to keep the seller as the insurance’s beneficiary instead of the buyer. Changing beneficiary on the insurance policy is one of the major reasons the lenders find out the wraparound mortgage. In the current real estate market though, as long as it’s a performing mortgage, the chance for a lender to call due on a loan is slim.